ITIF: The global economy—and trade among its members—is evolving rapidly. Many economies are seeking to drive economic growth through innovation, including boosting the use of information and communications technologies among all organizations, helping companies become more productive and innovative, and enabling the creation of new companies producing high-value-added products and services. Driving this shift has been the realization by a growing number of economists that it is innovation—the improvement or creation of products, processes, services, and business or organizational models—more than the accumulation of savings or capital that has become the central driver of economic growth and the key to improving standards of living. Yet the growing awareness of innovation’s key role in national economic well-being and competitiveness has spawned a race for global innovation advantage.

As economies seek to realize the highest levels of innovation-based economic growth, they will need to design their policies with regard to trade, technology, competition, intellectual property rights, procurement, and even taxes and education in optimal ways to bolster their innovation capacity. But as innovation becomes the focal point of economic growth, economies will also have to implement their innovation-supporting policies in a manner that does not distort global trade. Accordingly, the rules governing the international trading system will also have to evolve, so that trade in innovative products and services is as unrestricted as trade in manufactured goods. This will require maintaining a focus on removing quantifiable trade barriers, such as tariffs, but complementing that approach by vigilantly removing non-tariff and technical barriers to trade while eschewing the erection of new barriers. The reality is that trade policy and innovation policy have come together to the point where now they are intimately intertwined: it’s impossible to make trade policy without an understanding of innovation policy, and it’s likewise impossible to craft innovation policy without an understanding of trade policy. Fundamentally, this is because innovation—both its production and consumption—has become globalized, for three reasons.

First, a non-globalized innovation system is a sub-optimal one. Open markets lead to an increase in the size of the marketplace and allow innovative firms to realize economies of scale, thus enabling them to reinvest earnings into the next generation of innovative products, engendering a virtuous cycle of innovation. This is especially important for industries with relatively high fixed costs but low marginal costs of production (such as semiconductors, software, video games, movies and music, pharmaceuticals, biotechnological products, etc.) since larger markets can be served with overall declining average costs.

Second, by exposing domestic firms to globalized competition, trade acts as a strong driver of innovation and productivity growth. Indeed, exposure to international markets has been shown to have a strong positive effect on both enterprises’ incentives—and ability—to innovate.

Finally, there is a learning effect from innovation. The more that innovative businesses and individuals in all economies are exposed to the new challenges, opportunities, ideas, technologies, and capabilities that exist in foreign markets, the more those innovators can develop innovative solutions in response. The world is rich in problems, yet if organizations are innovative only in their own markets, their knowledge base and exposure to problem sets is incomplete.

In summary, APEC economies possess a unique opportunity to move beyond facilitating trade in existing products and services to fostering the world’s leading regional environment in which both the production—and ensuing trade and usage—of innovative new products and services is maximized, thereby driving economic growth and improving the quality of life for citizens not just in APEC economies, but worldwide. To make this a reality, APEC members will need to foster open economies that allow the free flow of capital, people, ideas, goods, and services across borders in ways that promote competition. However, to realize this vision, member economies will have to not only rethink their approach to trade and investment, but also embrace critical core innovation principles. Indeed, economies are unlikely to achieve sustainably high rates of innovation if their governments have not put in place a broad range of innovation-enabling policies that create the conditions in which organizations throughout an economy—whether private enterprises, government agencies, or non-profit entities—can successfully innovate. To help them do so, this report provides a structured assessment of policies informing the innovation capacity of the 21 APEC member economies. Moreover, it highlights the most effective policies APEC members have used to build their innovation capacity and describes how APEC members can learn from one another.

The report assesses APEC member economies on their strength in six core policy areas:

2. Science and research and development (R&D) policies that spur innovation;

3. Digital policies that enable robust deployment of information and communications technology (ICT) platforms that support a broad range of digital applications;

4. Intellectual property rights (IPR) protection policies;

5. Robustness of domestic competition and new firm entry;

6. Open and transparent government procurement policies.

In preparing this report, we searched extensively to identify as many indicators relevant to the six core innovation policy areas as possible. The report includes every indicator relevant to an economy’s innovation policy that we were able to identify, provided that sufficient data existed for the indicator to provide coverage across all (or almost all) APEC economies. This study assigns weights to the six core innovation policy areas—and then to the sub-indicators which comprise each innovation policy area—based upon an extensive review of the scholarly literature on innovation policy and our own judgment and expertise in the field.

Overall, the six core innovation policy areas receive fairly balanced weights in the study, as Table ES-1 shows. For economies to create an environment in which innovative organizations and innovation in general flourishes, it’s vital that they craft innovation- and competition-promoting policies with regard to market access, foreign direct investment, and standards; science and R&D; digital/ICT; and intellectual property rights, and so economies’ scores on each of these four policy areas accounts for 17.5 percent of their overall score. An economy’s openness to trade—characterized by open market access, receptivity to foreign direct investment, and participation in collaborative, international standards-setting processes—has become an increasingly important bedrock pillar of its innovation capacity. Likewise, economies’ science and R&D policies—such as levels of government and corporate R&D investment and higher-education R&D performance—are crucial to the development, diffusion, and adoption of new technologies that substantially drive innovation.

For its part, ICT has become a central driver of innovative new services and business models, productivity improvements, and economic growth for developed and developing economies alike. And economies that fail to provide and enforce intellectual property rights stifle innovation by failing to provide adequate incentives and protections to innovators while discouraging the inflow of foreign technology and investment. Economies’ policies that promote domestic competition and entrepreneurship as well as government procurement which fosters innovation are also important, and so economies’ scores on each of these two core innovation policy areas account for 15 percent of their overall scores.

The intent of this study is to provide a generalized sense to APEC economies of how well they are doing relative to their peers on these six core innovation policy areas, so that they can identify their strengths, weaknesses, and opportunities for improvement in innovation policy. As this is an overall framing and assessment report, it does not report economies’ individualized scores; rather APEC economies are ranked as upper-tier, mid-tier, or lower-tier on each of the six core innovation policy areas, with those ranks calculated based on economies’ performance on an array of key sub-indicators relevant to each core policy area. (In total, the study assesses 73 sub-indicators.) The tiered rankings of economy performance in each of the six core innovation policy areas were constructed using equidistant partitions of the set of weighted aggregate scores derived from each economy’s normalized sub-indicator scores.1 Economies’ ranks on the six weighted core innovation policy areas are then aggregated to produce an overall ranking reflecting the strength of their innovation policy capacity, as shown in Table ES-2.

The study finds Australia, Canada, Chinese Taipei, Hong Kong, Japan, New Zealand, Singapore, and the United States to have the most robust innovation policy capacities in the Asia-Pacific region. Chile, Korea, and Malaysia are in the mid-tier, and Brunei, China, Indonesia, Mexico, Papua New Guinea, Peru, the Philippines, Russia, Thailand, and Vietnam are in the lower-tier. Table ES-3 shows where each APEC economy stands with regard to each of the six core innovation policy areas.

Trade: As innovation and trade policy have become increasingly intertwined, openness to trade characterized by open market access and receptivity to foreign direct investment (FDI) has become an increasingly important bedrock pillar of an economy’s innovation capacity. Free trade benefits all economies by allowing each to specialize in producing the products or services for which it has comparative and/or competitive advantage. This also suggests that economies shouldn’t specialize in all technologies; rather, trade enables them to specialize in what they are good at and trade for the rest. A vital component of free trade is economies’ openness to both inward and outward foreign direct investment. Research shows that FDI contributes significantly to regional innovation capacity and economic growth, in part through the transfer of technology and managerial know-how. In fact, a study comparing East Asian with Latin American economies found that the larger trade and foreign direct investment flows demonstrated by East Asian economies explained their relatively stronger technological growth than that of the Latin American economies. Another important component of economies’ trade policies is their use of voluntary, market-led, and global standards that promote innovation and competition while creating global markets for products and services.

This study assesses eight measures of APEC economies’ trade, market access, and foreign direct investment policies, assessing indicators such as their average tariff levels, tariffs on advanced technology products, degree of restrictions on services trade, participation in regional trade agreements, openness to FDI, and use of standards policies. It finds that Australia, Chile, Hong Kong, Japan, New Zealand, Singapore, and the United States exhibit the greatest openness to trade, market access, and foreign direct investment among APEC economies. Brunei, Canada, Chinese Taipei, Indonesia, Papua New Guinea, Peru, and the Philippines are mid-tier economies, while China, Korea, Malaysia, Mexico, Russia, Thailand, and Vietnam are lower-tier economies.

Science and R&D: Science and R&D policies—including those regarding R&D tax incentives, government R&D expenditures, and university ownership of intellectual property—boost economies’ innovation potential while enhancing their ability to benefit from technology-based innovation. But science and R&D policies, such as the ability to partake in R&D tax incentives or receive R&D grants, should not discriminate against foreign firms operating domestically, for economies that do so limit their own ability to reap benefits from the sharing of ideas, knowledge, and skills that enhance the entire global innovation system. Moreover, leader economies’ science and R&D policies ensure that the terms and conditions of technology transfer, production processes, and proprietary information are voluntary and left to agreement between individual enterprises.

An analysis of five sub-indicators in science and R&D policy finds Australia, Canada, Chinese Taipei, Japan, Korea, Singapore, and the United States to be leaders. They are followed by Chile, China, Hong Kong, Malaysia, New Zealand, Russia, Thailand, and Vietnam in the mid-tier and Brunei, Indonesia, Mexico, Papua New Guinea, Peru, and the Philippines in the lower-tier. This study finds a slight difference in emphasis between the science and R&D policies of developed and developing economies. Science and R&D policies in developed economies often focus on increasing the supply of ideas and knowledge in the economy and incentivizing their commercialization, whereas in less developed economies they often involve helping a nation’s organizations (private, public, and non-profit) adopt newer and better technologies than those that are currently in use. Nevertheless, science and R&D policies in all APEC economies need to embrace elements from both approaches.

Digital Policies: Information and communications technology (ICT) is the global economy’s strongest enabler of productivity and innovation. Effective digital policies focus first and foremost on spurring the use of ICT throughout the economy, as the vast majority of benefits from ICT, as much as 80 percent, come from the widespread usage of ICT, while only about 20 percent of the benefits comes from its production. Leading economies recognize that the greatest opportunity to improve their economic growth lies in increasing the productivity of their domestic sectors, particularly through the application of ICT.

This report assesses 34 sub-indicators to evaluate APEC economies’ digital policies. Australia, Canada, Chinese Taipei, Hong Kong, Japan, Korea, New Zealand, Singapore, and the United States possess the digital policies which contribute most strongly to their economies’ innovation capacity. Chile, China, Malaysia, and Peru represent mid-tier economies, while Brunei, Indonesia, Mexico, Papua New Guinea, the Philippines, Russia, Thailand, and Vietnam are in the lower-tier. Economies with the best digital policies, including policies relating to data privacy, security, and telecommunications, implement them in ways that minimize their trade-distorting and investment-limiting impact while promoting greater global alignment of ICT policies. Leader economies have also embraced membership in the World Trade Organizations (WTO’s) Information Technology Agreement, which has substantially eliminated barriers to trade in ICT products.

IPR: Effective protection and enforcement of IPR encourages innovators to invest in research, development, and commercialization of technologies while promoting their dissemination throughout the Asia-Pacific region. But weak intellectual property rights protections reduce the flow of foreign direct investment and technology transfer. Without adequate intellectual property protections, there will be less innovation overall, and this hurts all economies. Moreover, as the World Bank finds, IPR reform tends to deliver positive economic results, regardless of an economy’s level of development.

This report assesses five sub-indicators to evaluate economies’ IPR protection policies. These indicators show that Australia, Canada, Hong Kong, Japan, Korea, New Zealand, Singapore, and the United States have implemented the strongest intellectual property protections among APEC economies. Brunei, Chile, Chinese Taipei, Malaysia, and Mexico are mid-tier economies with regard to intellectual property rights protections, while China, Indonesia, Papua New Guinea, Peru, the Philippines, Russia, Thailand, and Vietnam are lower-tier economies that have the most room to strengthen intellectual property protections.

Domestic Competition: Vibrant domestic markets supported by a sound and fair regulatory environment that allows both existing and new firms to compete on a level playing field remain a lynchpin of prosperity. Indeed, one of the strongest drivers of innovation and productivity growth is the existence of competitive marketplaces. This includes removing regulatory restrictions, incumbent protections, cross-border trade restrictions, and labor market restrictions that inhibit competition. Leading APEC economies feature regulatory systems that are transparent and non-discriminatory, provide due process, and include opportunities for meaningful engagement on the part of all stakeholders.

This study assesses eighteen indicators of APEC economies’ degree of openness to domestic market competition, organized into three categories: the regulatory environment, the competitive environment, and the entrepreneurial environment. On these measures, Australia, Canada, Chinese Taipei, Hong Kong, Japan, New Zealand, Singapore, and the United States exemplify the greatest degree of openness to domestic market competition among the APEC economies. Brunei, Chile, China, Korea, Malaysia, Thailand, and Vietnam are mid-tier economies, while Indonesia, Mexico, Papua New Guinea, Peru, the Philippines, and Russia are lower-tier economies in this category.

Government Procurement: Because government procurement accounts for such a large share of most economies, ensuring fair and open government procurement practices has become a vital aspect of realizing liberalized global trade. A core principal of market-based trade is that government purchases should be made on the basis of the best value for government, not on the basis of national preferences. Yet this does not mean that APEC economies should not orient their procurement policies to become strong drivers of innovation. Indeed, government procurement policy is an important and legitimate component of economies’ innovation strategies. However, APEC members’ government procurement policies should be transparent, non-discriminatory, openly competitive, and performance-based. In particular, APEC members should not make the location of the development or ownership of intellectual property a consideration when awarding government procurement contracts. Further, APEC members should not impose requirements on foreign firms that they must license their intellectual property to a domestic entity either in order to receive permission or access to compete in local markets or to participate in foreign government procurement contracting activity.

An assessment of four key government procurement policy indicators reveals that Canada, Chinese Taipei, Hong Kong, Japan, Korea, Singapore, and the United States have implemented government procurement policies that contribute most strongly to their economies’ innovation capacity. Uniformly, leader economies are full members of the WTO’s Government Procurement Agreement (GPA). Australia, Chile, and New Zealand are mid-tier economies with respect to government procurement, while Brunei, China, Indonesia, Malaysia, Mexico, Papua New Guinea, Peru, the Philippines, Russia, Thailand, and Vietnam are lower-tier economies.

Conclusion: The Asia-Pacific region has the capacity to be the world’s most innovative. To realize this vision, APEC economies need to implement policies with regard to trade, science and R&D, ICT, intellectual property rights, domestic market competition, and government procurement in ways that maximize their innovation capacity but without distorting global trade. To accomplish this, APEC economies’ policies will have to be predicated on transparent, non-discriminatory, market-based principles that embrace both global standards and the free flow of talent, capital, information, products, services, and technologies. Moreover, APEC economies’ innovation policies need to accord respect for innovators’ intellectual property rights while creating incentives for them to keep innovating in ways that promote improvements in economic growth and quality of life.

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Cap Falcon

“I see in the near future a crisis approaching that unnerves me and cause me to tremble for safety of my country; corporations have been enthroned, an era of corruption in High Places will follow, and the Money Power of the country will endeavor to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic destroyed.”
ABRAHAM LINCOLN, letter to Col. William F. Elkins, Nov. 21, 1864
Ref: The Lincoln Encyclopedia, Archer H. Shaw (Macmillan, 1950, NY)